Transfer pricing regulations play a crucial role in ensuring fair taxation and preventing profit shifting in related party transactions. In Malaysia, the statutory rules, regulations, and circulars governing transfer pricing are primarily defined in Section 140A of the Income Tax Act, 1967 (ITA). This blog post aims to provide a detailed understanding of the key statutory rules, the role of the tax authority, and the application of OECD guidelines in the Malaysian transfer pricing landscape.
Relevant Rules, Regulations, and Statutory Basis
Prior to the introduction of specific transfer pricing rules, Malaysia relied on the general anti-avoidance provisions in Sections 140 and 141 of the ITA to address transfer pricing concerns. However, recognizing the limitations of these provisions, the Finance Act 2009 introduced Section 140A of the ITA, which now serves as the main statutory rule for transfer pricing enforcement.
Section 140A of the ITA focuses on related party transactions involving the acquisition or supply of property or services. It empowers the Director General of the Inland Revenue Board (IRB) to make adjustments based on the arm’s length principle. This provision extends to both domestic group transactions and cross-border transactions. For instance, if a domestic entity enjoys tax exemption, the tax authorities may scrutinize related party transactions within the group to ensure that profits are not artificially shifted to take advantage of the tax exemption. Additionally, Section 140A also encompasses thin capitalization concerns.
Despite the introduction of Section 140A, Sections 140 and 141 of the ITA remain available as additional measures for the IRB to enforce transfer pricing rules. Furthermore, certain definitions from Section 140 have been adopted for the purposes of Section 140A. Section 140 empowers the DGIR to disregard or vary a transaction and make necessary adjustments when there is a belief that the transaction alters the tax incidence on any person. This provision has broad applicability to various local and cross-border transactions. Section 141 contains specific provisions that apply to international transactions between residents and non-residents, making it directly relevant in many transfer pricing scenarios.
Transfer Pricing Guidelines and Advance Pricing Agreements
To provide detailed guidance on transfer pricing, Malaysia introduced the Transfer Pricing Guidelines (TP Guidelines) in 2003. These guidelines were later replaced by the 2012 Transfer Pricing Guidelines (TP Guidelines 2012) under the Income Tax (Transfer Pricing) Rules 2012. The TP Guidelines 2012 define contemporaneous transfer pricing documentation requirements, allow for the use of five OECD-approved transfer pricing methods, recognize the concept of cost contribution arrangements (CCAs), and provide guidance on determining the arm’s length price for intangible assets and financial arrangements.
In 2009, Malaysia implemented Advance Pricing Agreements (APAs), allowing taxpayers to seek advance agreements on transfer pricing with the tax authority. The APA Guidelines 2012 outline the application process and the negotiation procedures for APAs.
Taxing Authority and Tax Law
The Inland Revenue Board (IRB) serves as the direct tax administration agency responsible for enforcing transfer pricing rules in Malaysia. It plays a crucial role in ensuring compliance and assessing the arm’s length nature of related party transactions. The IRB possesses the authority to conduct audits and make necessary adjustments to transfer prices that do not conform to the arm’s length principle.
Application of OECD Guidelines
Although Malaysia is not an OECD member and is not formally bound by the OECD Guidelines, the Malaysian TP Guidelines explicitly state their alignment with the arm’s length principle established in the OECD Guidelines. The IRB respects the general principles of the OECD Guidelines as the governing standard for transfer pricing. This approach ensures consistency and international harmonization in transfer pricing practices.
Transfer pricing regulations in Malaysia, governed primarily by Section 140A of the ITA, aim to prevent tax avoidance and ensure fair taxation in related party transactions. The IRB, as the tax authority, enforces these rules by conducting audits and making necessary adjustments. While Malaysia is not a formal member of the OECD, the country aligns its transfer pricing guidelines with the OECD Guidelines, recognizing the importance of international best practices.
Understanding the statutory rules, regulations, and circulars related to transfer pricing in Malaysia is essential for businesses operating in the country. Adhering to the arm’s length principle and maintaining proper documentation will help businesses navigate the complex transfer pricing landscape and avoid potential tax disputes.